One concern about monetary policy is that the outcomes of a shift in monetary policy can take time to have an effect on the economy. This delay, called a lag, occurs in different ways. The most common is impact lag, the delay between the implementation of a policy and the effects of that policy. Analysts may spot an economic difficulty in time to enact a swift policy change; however, the indirect nature of monetary policy means that these policy changes take time to deliver tangible impacts. It can take more than a year for a monetary policy change to produce a significant effect on aggregate demand, by which time harm to businesses and livelihoods may already be acutely felt. Recognition lag is a delay between the emergence and recognition of a problem. It occurs when a problem is spotted too late for timely action to be taken. This is usually a consequence of difficulties collecting or interpreting economic data. Economists may disagree, for example, about the severity of an inflationary or recessionary period. By the time the events are clearly understood, measures that would have reduced the impact may be far less effective than if they had been applied earlier. Implementation lag occurs when there is a delay between the recognition of a problem and the implementation of policy to remedy it. Economists, for example, may agree that a country is on the verge of hyperinflation, but political disagreements may delay the implementation of measures that prevent the problem.
Another concern about monetary policy is the issue of targeting, which involves deciding on which aspects of the economy to focus intervention efforts. Implementing monetary policy is a complicated process. Policymakers have to decide what the desired outcome should be as well as the best variables by which to target their policy. The Fed has primarily concentrated its monetary policy on the federal funds rate (the rate charged for loans of excess reserves between banks) because of its influence on short-term interest rates. However, the Fed also has the option to focus on policies pertaining to price level and money growth rate, the rate at which the amount of money in an economy grows.
The degree of impact that monetary policies have on the economy has also been scrutinized. Contractionary policies are generally believed to have a relatively clear and immediate effect on the macroeconomy. However, this is not always the case with expansionary policies because investment is volatile—especially because investment activity reflects levels of trust in future expectations. Thus, expansionary policy must be aimed at increasing confidence in future performance, which is a difficult variable to target.
In the United States, there are a few examples when a contractionary policy was implemented at the wrong time. The most notable example occurred during the Great Depression, when Franklin D. Roosevelt was president. This New Deal was a program of expansionary fiscal policies aimed at ending the Great Depression. The early New Deal programs (fiscal spending programs during the presidency of Franklin D. Roosevelt), which included support for farmers, unemployed individuals, youth, the elderly, and public works projects, represented an expansionary policy that had been successful in combating the depression at the time. Political pressure to address the national debt, however, forced Roosevelt to change tack and cut back on government spending. The result was the return of the depression in 1937 (the Great Depression), caused in part by the Federal Reserve's decision to increase its requirements for money in reserve. The Fed's decision to have more money in reserve meant that there was less money being lent out to those who wanted to spend it; thus, it had a contractionary effect in the economy. The impacts of depression continued until an expansionary policy was fully restored during World War II. During the war, the government needed to increase spending to support the war effort abroad. This meant more spending on equipment such as tanks and ammunition, which led to more jobs and more spending down the line.